What’s behind the bull market – Jan. 31, 2013

What’s behind the bull market

U.S. stocks are flirting with all-time highs, climbing to levels not seen since before the financial crisis.

The Dow Jones industrial average is hovering just below 14,000. The S&P 500 recently broke above 1,500 and is inching closer to a new record. Both indexes have risen to their highest levels since October 2007.

“The market environment is likely to get tougher in February and March as investors wrestle with the impact of fiscal tightening on the economy,” said Russ Koesterich, BlackRock’s global chief investment strategist.

What’s behind the rally

There are a number of factors at play, including signs of improvement in Europe and sustained growth in China. But analysts say the Federal Reserve’s stimulus moves have been the main driver.

The current bull market dates back to March 2009, but the rally really gained momentum after the Fed launched its second round of quantitative easing, or QE2, in 2010.

The bond-buying strategy, now in its third iteration, has coincided with a broad improvement in economic data and record profits for U.S. corporations.

But the rally is as much about what did not happen as what did.

The U.S. economy did not fall off the fiscal cliff, and lawmakers have delayed a showdown over the debt ceiling until mid-May.

The eurozone did not collapse under the weight of its crushing debt, thanks largely to aggressive moves by the European Central Bank.

And the Chinese economy appears headed for a soft landing, easing worries about demand in the world’s second largest economy.

Investors were also drawn back into the market by attractive valuations, which is a fancy way of saying stocks are cheap.

Since the market bottomed in 2009, many large investors have been scooping up shares of companies that were beaten down in 2008. Many bank stocks, for example, were trading well below book value, which is the theoretical price their assets are worth minus their liabilities.